Millennials — and younger Americans — have been the subject of some ridiculous tropes: avocado toast, pumpkin spice lattes, the lazy TikTok generation. I could go on.
And now, they’ve been pinned with the worst trope of all: the irresponsible demographic that could be the cause of the next recession. Some people think the spending shift from Taylor Swift tickets to student loan payments — which resume next week — could suck the life out of the economy.
It’s a fair concern, but I wouldn’t lose sleep over it. And frankly, I think we’re underestimating the spending power of younger generations.
Here’s why.
An isolated problem
Student loan debt is an incredible burden for many Americans, and it comes with a shocking price tag. In 2019, Americans paid about $70 billion towards their student loans, a cost that my friend Joey Politano pointed out is roughly equal to what consumers spend per year on internet bills.
But to focus on the total cost ignores some important nuances in the conversation. First of all, that $70 billion is a small fraction of our budgets. In 2022, Americans spent nearly $70 trillion per year on all kinds of goods and services. Even if you adjust that $70 billion for inflation, that $81 billion in calculated cost is just 1 to 2% of total consumer spending.
Plus, if you look at the distribution of student loan debt, it’s a small pool of borrowers bearing much of the burden. Just 40% of Americans hold federal student loans, and 10% of borrowers are shouldering nearly half the debt load, according to College Board data.
Younger Americans hold more student debt
While the student loan burden is serious, it doesn’t have the type of systemic reach that massive unemployment or an inflation crisis would have on the economy. Student loan payments could dent spending, but probably not to a degree that tips us into a recession.
Economic power
If we’re talking about student loans, we also need to discuss how the economy has shifted in younger generations’ favor over the past few years.
Much of this shift has happened in the job market. Younger and lower-skilled workers have enjoyed the bulk of pay increases, and the percentage of employed Americans between the ages of 25 and 54 is at a two-decade high. People are gainfully employed and they’re making more money.
Many millennials also reached their prime home-buying years during a stretch of historically low mortgage rates and started investing at the depths of COVID. Since the March 2020 lows, the S&P 500 has almost doubled in value, while Bitcoin’s price has quadrupled.
If you’re a younger American, chances are you’ve caught a few — or all — of those tailwinds. That means the cumulative net worth of Americans under 40 has grown more than 40% over the past four years, more than any other age group that the Federal Reserve tracks. And if you’re doing better financially, you’ll probably have an easier time paying off your debt.
One trend that sticks out to me is just how comfortable younger investors are with their financial situations, at least relative to their older counterparts. According to our latest Retail Investor Beat survey, 76% of investors ages 18-44 feel confident about their income and living standards, compared to 54% of investors 45 and older.
A surge in confidence
A big bank account
Debt levels these days are high when you look at them in a vacuum. But what if I told you they’re actually quite low relative to historical standards?
It’s true, if you consider the context. Credit card balances are over $1 trillion — a daunting figure at first glance. Yet that $1 trillion is just 6% of total deposits in the bank, the lowest percentage in at least two decades. Debt levels matter less when you have the money to cover them.
That seems to be the case with student loans, too. Younger Americans have enjoyed some favorable economic shifts, and it’s reflected in their bank accounts. Consumer debt held by Americans 40 and under (which includes student loans), is just 13% of the level of assets they own, the lowest percentage since September 2008. In other words, many borrowers have the best financial capacity to pay back their loans in over a decade.
Better yet, younger investors tell us they’re not changing their investing plans over the next three months, even though they’ve known for a while that they’ll have to start paying back their student loans. 94% of investors ages 18-34 and 96% of investors ages 35-44 expect to invest the same amount of money or more over the next three months (relative to the last three months). You’d expect a much different answer if student loan payments were a significant burden.
While money has to come from somewhere, people aren’t drastically cutting back on their investing or spending money to cover their payments. Even better, efforts from the Biden administration to ease student loan burdens through income-based adjustments and forgiveness could mean many borrowers’ monthly payments are that much more manageable.
So what does this mean for me?
I don’t want to gloss over valid struggles that many Americans are going through. It hasn’t been an easy few years for anyone, and plenty of millennials are still saddled with student loans while staring down a recession and rampant inflation.
But when we’re talking about the impact student loan payments have on the entire economy, you have to consider the totality of the data.
So as we watch consumer spending through the end of the year, keep these points in mind:
Pay attention to earnings season. Retailers’ upcoming earnings season could give you important clues on how much student loan payments could bite budgets. Consumer discretionary profits are expected to grow 19% next year (according to Bloomberg estimates), the second-strongest earnings growth of any S&P 500 sector. That may be too optimistic, or maybe Wall Street knows something we don’t.
Watch oil. Higher oil prices don’t make a lot of sense, but they do put a strain on a majority of Americans’ budgets. In fact, Americans spent $510 billion on gas and energy costs last year – seven times what they spent on student loans in 2019. Honestly, oil is on the top of my risks list, so keep an eye on it.
Remember the risks. Student loan payments may not derail consumer spending, but the immense pressure on the economy could. Watch jobs data — especially initial jobless claims — for signs of weak hiring and higher unemployment.
*Data sourced through Bloomberg. Can be made available upon request.
**The Q3 2023 Retail Investor Beat survey was based on a survey of 10,000 retail investors across 13 countries and 3 continents. The following countries had 1,000 respondents: UK, US, Germany, France, Australia, Italy and Spain. The following countries had 500 respondents: Netherlands, Denmark, Norway, Poland, Romania and the Czech Republic.